Let's switch interest payments on Public sector debt from the markets to small savers

I've just discovered a way of presenting European Public Sector debt and Interest payments that I really think should force people to think hard, and could provide a real way out of the current debt crisis.

I've already made a big thing about how the size of interest payments on public sector debt is a massive drain on taxpayers across the European Community. My first analysis of the figures for 2010, already showed that 2.7% of total GDP in 2010 went to pay interest charges. When I had another look when the figures for 2011 came out I was able to show that those interest payments had cost €370.8 billion - 2.9% of GDP - and that for the period 1995-2011, interest payments had cost over €5.6 trillion. The figures for 2012 were even worse, because the interest payments had increased by another €10 billion a year to €380.3 billion.  And finally, when I looked at the latest official figures - those for 2013 - the interest payments since 1995 had reached the impressive total of €6,244 billion - 54.8% of all the public sector debt.

What has been even more nauseating about this whole sorry story has been the realisation that when commercial banks make loans to governments, they don't actually need to have the money they lend. They can simply create the "money" out of thin air. We are supposed to believe that somehow the amount of money that the Banks can create in this way is controlled - that they can only create roughly 10 times as much credit as they have capital. This is a MYTH! Look at the ratios of Assets to Capital for the 50 biggest banks in the world,  and you will see that many banks have hundreds or even thousands of times more assets than they have capital. Société Générale, for example, has 1238 times more assets than it has capital. How do they get away with it? Well, I think this is because the wonderful Basel Banking Regulations (concocted by the Bank for International Settlements) gives a risk weighting of 0% when Commercial Banks create money to lend to AAA to AA- rated governments. There is literally no limit to the amount of "money" that can be loaned to a cooperative government. And of course, the politicians who are sufficiently ignorant to be conned by this trick end up paying vast amounts of tax payers money to a bunch of sharks who have set up the worlds biggest con trick.

To get a clearer idea of just how much the system of public sector debts and interest payments sucks out of the economy, I did a simple thing with the data that anyone can download from the Eurostat website. I downloaded all the data for all European countries since 1995 for two things - Gross Government Consolidated Debt, and Interest payments. By looking at the ratio between the two, you can get a number which is the effective interest rate that is being paid to the markets. And here, dear reader, is the result.

Let me stress that, to obtain this table, I'm really just taking the raw data off from Eurostat. I have sorted the countries to be alphabetical order, but that's about it. As you can see, the current interest rate being paid on public sector debt averages about 3.2% - 3.14% if we just take the Eurozone. But the rate varies between countries. Hungary paid most last year, with a rate of 5.58%, while Estonians got the best rate of 1.37%.

When I looked at these numbers, it suddenly dawned on me that there is a simple solution to the current crisis! The return rates being paid by governments to the Financial Markets and Commercial Banks who can make loans with non-existent money are much higher than are typically offered to real savers who are trying to get a reasonable return from their savings. Take France, for example. Since 1995, the French government has been paying an average return of 4.42%. Sure, it has dropped from the peak of 6.31% in 1995, and is now 2.46% - its lowest rate. But that number is still much better than the dismal rate of just 1.0% offered by the Livret A - a government savings scheme used by around 46 million people - around three quaters of the entire French population.

So, isn't there an obvious solution here?  Instead of offering to take loans from Banks who are allowed to make loans using non-existent money, Governments across Europe should be forced to only borrow money from their own citizens - citizens who are desperately trying to get a decent return on their savings, but are typically offered a pittence, because quite simply, the commercial banks don't even need their savings to make loans.  After all, if you are a Bank, why pay a decent interest rate on savings when you can just invent some money out of thin air?

In France, government borrowing is handled by the Agence France Tresor. The AFT provides limited information about who holds French debt. For example,  the provide a graph showing the percentage of the debt that is held by Non-residents. Here it is, and it shows that the latest figures were 64.5% and rising.

They also have a pie-chart for what are called OATs (Obligations Assimilables au Trésor), one of the three main instruments used by the French government (the others are BTFs, and BTANs), showing that 59% are held by non-resident investors, 23% by French Insurance Companies, 11% by French Credit Institutions (I presume that means banks), 2% by French UCITS (Undertakings for the Collective Investments in Transferable Securities) and 5% in French "Other".

For me, the fact that 59-64% of French taxpayers money used to pay interest payments leaves France is obviously a bad idea.  But it looks like the percentage of the debt held by Small investors in France may be tiny.

So, here's my proposal. It's one that might be taken seriously by François Hollande's government, clearly lacking any real ideas for changing the rules of the game.

Firstly, I would make it illegal for Governments to sell bonds to Banks that cannot prove that they actually have the money they use.  Only preexisting assets should be used to buy government bonds.

Second, I would introduce measures that would mean that the Governments debt should be shifted progressively to small savers, rather than institutional investors. Essentially, if a small saver is not getting the same rate as his or her government is paying to the financial markets - i.e. the numbers in my table - then something is very wrong.

My vote is that the system should be set up rather like the current Livret A system in France, which limits the amount of savings that each person can deposit to €22,950.  That would ensure that the money generated by the interest payments would be spread as widely as possible.

I read that France is known as a country where people have a lot of money in savings. In 2011, the INSEE calculated that the French public had accumulated just over €10,300 billion - equivalent to 8 years of total revenue. While 2/3 of this is invested in "non-financial" investments - essentially property, about 1/3 - namely about €3,400 billion is invested in financial products like the Livret A, Savings accounts, Bonds, Insurance contracts.  It follows that if the French government wanted to, it might be able to shift virtually the entire public sector debt (around €1,925 billion) to its citizens, and pay them the same sorts of interest rates that they currently pay to "non-resident investors" and the financial markets.  I'm sure that would make a lot of French savers very happy, and it would keep the money within the French economy.

Of course, exactly the same sort of proposal could be made for every country in Europe and beyond.

I can imagine that this proposal won't go down well with the Financial Markets. After all, they have been used to being able to create unlimited amounts of "money" to buy up goverenment debt, and then pass on the resulting "products" to other actors like pension funds and so forth, raking in massive amounts of tax-payers money in the process. Clearly, they won't be very cooperative in any attempt to kill off the goose that has been laying them golden eggs for decades.

But maybe one day, François Hollande may realise that one of the reasons that he got elected was his famous speech at Le Bourget in january 2012 when he said:

"I will tell who is my adversary... my true adversary
My adversary has no name.
Has no face.
No history.
He will never be a candidate in an election.
He will thus never be elected.
Nevertheless - he governs.
My adversary is .... the world of finance."

Well said.